An agency awarding a fixed-price contract can only evaluate offerors’ proposals for price realism–that is, determine whether offerors’ proposed pricing is so low as to be unrealistic–if the solicitation calls for a price realism evaluation.

In a recent bid protest decision, the GAO confirmed that when a fixed-price solicitation does not advise offerors that a price realism evaluation will be conducted, the agency is not permitted to reject an offeror’s proposal because of unrealistically low pricing.

The GAO’s decision in ERIMAX, Inc., B-410682 (Jan. 22, 2015) involved a NOAA RFQ seeking the establishment of a BPA for acquisition and grant management services. The RFQ called for vendors to submit fully-burdened hourly labor rates for labor categories provided by the agency. Once labor rates were entered, the agency’s spreadsheet would automatically calculate total prices using the rates provided by the vendors. The RFQ stated that proposed prices would be evaluated to determine whether they were fair and reasonable.

Lowest Price, Technically Acceptable (LPTA) contracts might save the government some money, but they deter innovation, a panel of government contracting officials said Monday (May 19, 2014).

“I don’t know a senior leader in government that thinks LPTA is the best,” said Tiffany Hixson, regional commissioner for the General Services Administration. “Contracting and innovation is about risk management.”

But with shrinking budgets, agencies are looking to lower their costs and LPTA contracts do just that, said Robert Coen, acting director of the National Institutes of Health Information Technology Acquisition and Assessment Center.

“There’s way too much LPTA going on,” Coen said at the May 19 ACT-IAC Management of Change Conference. “LPTA should be used for commodity buys, not innovations.”

Last week, a U.S. District Court judge in Florida held that a government contractor working under a fixed-price contract is not liable under the federal False Claims Act (“FCA”) for higher than expected profits and “failing to notify the Government that the work could be performed less expensively and charged at a lower price” than the contract price. U.S. ex rel. Prime v. Post, Buckley, Schuh & Jernigan, Inc., and Parsons Corporation, No. 10-cv-1950 (M.D. Fl. Aug. 23, 2013).

The nature of the contract was critical to the outcome of the case. In U.S. ex rel.Prime, two contractors, Post, Buckley, Schuh & Jernigan, Inc. (“PBS&J”) and Parsons, formed a joint venture for the project (the “JV”). The JV entered into a fixed price indefinite delivery/indefinite quantity contract with the Government, under which fixed price task orders would be placed. Prices on the individual task orders were lump-sum, determined in accordance with the agreed-upon labor rates multiplied by the number of days required to complete the work, and included a profit component. The labor rates and lump-sum task order prices were a product of lengthy negotiations between the JV and Government representatives. During those negotiations, which were transcribed, the Government noted the potential for the JV to increase its profit margin by injecting greater efficiency into its performance.

In 2011, by comparison, half of government contractors reported increased revenues and about 30 percent reported a decrease, Crenshaw said during a Dec. 14, 2012 event hosted by the Association for Federal Information Resources Management. The consultant plans to release its 18th annual government contractor industry survey later this month.

Retired Vice Adm. Lewis Crenshaw Jr. is a former Navy aviator so you have to forgive his aviation analogy, but in presenting accounting firm Grant Thornton’s annual contractor survey he made a convincing case that many companies in the market are dangerously close to stalling out.

On the surface, some of the numbers look good: 50 percent of the respondents said revenues were up. But that is down from last year’s survey that showed 55 percent reported growth.

Also troubling, is that 29 percent reported a decrease in revenue, compared to 22 percent last year.

Companies also reported profit margins in keeping with previous surveys, but the profits aren’t coming from revenue growth, Crenshaw said, but from controlling costs.

The aviation analogy for Crenshaw, now the national practice leader for Grant Thornton’s aerospace and defense market sector, is that you can only slow your airplane down for so long before it stalls and then you crash and burn.

“Next year’s numbers should be very interesting to look at,” he said.

Another warning sign is the assets to liability ratio, where 60 percent of companies reported a ratio of two or less.

“You’re not in good shape with that and it supports my stall analogy,” he said.

Grant Thornton’s annual survey asks companies about a variety of financial and business factors, including financial statistics, compensation, business strategies and contracting issues such as delays and terminations and issues dealing with government customers.

The accounting and consulting firm uses the survey to present a benchmark of the market and as a platform for discussing trends in the market.

Some of the highlights of its findings include the fact that firm-fixed-price contracts have not grown in use, according to the respondents and remains at about 20 percent of contracts.

“Despite the rhetoric it hasn’t changed year-to-year,” Crenshaw said.

Companies reported that the use of task order contracts rose by 50 percent and that less than 45 percent of revenue came from these contracts.

Another interesting finding was that 81 percent of the companies reported that they were asked to do out-of-scope work on contracts and 84 percent of those did the work. Surprisingly, only 25 percent filed for adjustments to their contracts.

“Out-of-scope work might become a bigger issue if more contracts go to firm-fixed price,” Crenshaw said.

If sequestration of federal funds kicks in, agencies will face making deep cuts to programs and that pain will flow down to contractors, experts say.

A sequestration causes automatic, indiscriminate, across-the-board budget cuts. The failure of the so-called supercommittee to find $1.2 trillion dollars in savings over a decade triggered the cuts. They’re set to take effect Jan. 2, 2013.

As a result, contractors too “are hostages in a showdown between the president and Congress over fundamental decisions on taxing and spending,” said John Cooney, former general counsel at the Office of Management and Budget and now a partner at the Venable law firm.

He spoke Jan. 17 at a panel discussion hosted by the Professional Services Council that looked at sequestration in detail. Cooney broke down the possible routes federal officials may take to deal with the cuts.

Cooney expects agencies to:

Try to avoid terminating contracts. Instead, officials will reduce the amount of money obligated under their contracts.

Become less willing to extend contracts into their option years.

Obligate money for one fiscal year at a time on task order and services contracts.

Possibly use the prospect of the sequester’s cuts to renegotiate contracts.

He also said agency officials will more often decide to not award new contracts.

“This will be a common agency practice in year one of a sequester. Procurements that can be put off will be put off,” he said during the discussion.

With available money, agency officials will maximize contracts that meet their agency’s core duties, said Alan Chvotkin, executive vice president and counsel for the Professional Services Council, who spoke on the panel as well.

Meanwhile he expects agencies to look for more flexibility to avoid hard-and-fast commitments, such as fixed-price contracts and minimum revenue guarantees. And on the other hand, officials may use more time-and-materials contracts, which are based on labor hours and materials.

However, Chvotkin said there are some policy constraints as the Obama administration has railed against this type of contract, which places a lot of risk on the government.

IDIQs and the General Services Administration’s Multiple Award Schedules program may become more attractive to agencies. They allow for more negotiations at the task order level, he said.

Cooney had several suggestions for companies in light of what may happen. Advocate for the importance of a program and stay in close contact with a contracting officer. Realize though that the officer may not know the fate of a program until very late in the process.

Businesses should also emphasize what they can do for the agency, including the options the company is willing to agree to that may even decrease its revenue, Chvotkin said.

He recommended checking the Past Performance Information Retrieval System (PPIRS) and the Federal Awardee Performance and Integrity Information System (FAPIIS). The information needs to be correct, and it should reflect as favorably as possible on the company’s performance.

NASA might be cutting $1 billion from its space operations budget but a new study claims there are billions in opportunities in science and technology areas.

“As NASA shifts priorities for human spaceflight from shuttle operations to human exploration capabilities and commercial spaceflight, the budget will be redirected to a range of technology development programs,” said Steve Bochinger, president of Euroconsult North America.

The firm and its partner Omnis Inc. have released a new study, NASA Spending Outlook: Trends to 2016, which analyzes NASA’s budget.

As space operations shrink, the science budget will be redistributed among NASA centers, Bochinger said.

Among the findings:

The Science Mission Directorate saw an 11 percent bump in 2011 and will have a $5 billion through 2016. Goddard Space Flight Center and Langley Research Center will benefit because of the work on Earth science projects.

The Exploration Systems Mission Directorate will hold steady at about $3.9 billion but funds will shift away from human exploration activities.

The new Space Technology Directorate will get $1 billion a year from 2012 to 2016. Langley, Glenn and Ames research centers will benefit because of their work on new technologies for exploration and robotic spaceflight.

NASA is restructuring the Aeronautics Research Mission Directorate to focus on fundamental aeronautics and development of technologies for the Next Generation Air Transportation System.

The study also predicts that NASA’s business practices will have to change with a shift from cost-plus contracting to more fixed-price contracting.

The Government Accountability Office has recommended pulling a $25 million task order the Defense Information Systems Agency awarded Booz Allen Hamilton to enable the transmission of data between secure Defense Department computer networks.

The major defense and technology contractor fudged the likely cost of its employees’ workspace, artificially lowering its bid when competing for the work, according to an April 6 decision by GAO that was released in a redacted form Friday.

The contract to help DISA develop and manage its secure data transmissions was initially awarded in September to the smaller technology contractor Solers Inc., located in Arlington, Va., GAO said.

But the agency agreed to pull back the contract after Booz Allen asserted that contracting officials hadn’t sufficiently reviewed all the bids, the decision said.

The Defense agency then looked at revised bids and awarded the contract to Booz Allen in December 2010. The Solers bid was still technically superior, the agency said, but not worth a price hike of about 12 percent.

The Solers bid was about $27.4 million compared with the Booz Allen bid of about $24.6 million.

Solers objected to the Booz Allen award, saying the larger company hadn’t abided by a contract provision requiring a stable, fixed-price bid.

Booz Allen said in its bid that it was presuming more of its engineers would be able to use government workspace than the agency’s request for proposal had indicated.

Using government workspace would save money for both the contractor and the government, Booz Allen said. But the contractor noted that, if the agency declined to give the engineers government workspace, that would likely raise the contract price.

Booz Allen and DISA both claimed this quibble didn’t violate the contract’s fixed-price provision. It merely indicated Booz Allen might request an adjustment to its fixed price in the future, they said.

GAO disagreed, saying the “collective effect” of Booz Allen’s statements about government workspace added up to its offered price being “conditional, not firm.”

GAO also upheld Solers’ claims that the contracting officer hadn’t sufficiently evaluated the feasibility of Booz Allen’s proposal or looked closely enough at its past performance.

GAO recommended that DISA reevaluate bids for the project or reopen the bidding entirely. It also recommended that the agency reimburse Solers for the cost of its protest.

The Obama administration might be embracing fixed-priced contracts as the preferred method for purchasing goods and services from the private sector, but that strategy is not necessarily being implemented by the Army.

During a speech on Wednesday to service contractors, Malcolm O’Neill, assistant Army secretary for acquisition, logistics and technology, offered a surprisingly frank critique of fixed-price contracts.

“There is risk when you take something fixed-price,” O’Neill told members of the Professional Services Council, an industry trade association. “But my experience has been that when you offer a fixed-price bid, it’s 10 percent to 15 percent more than you need.”

O’Neill’s office often has argued against using fixed-price awards because of the belief that contractors build a cushion into their bids to compensate for the potential risks that occur during the length of a contract.

The Army wants the contractor to share the risk using more cost-plus, incentive-based contracts in which the vendor is rewarded for coming in ahead of schedule and potentially punished, through the loss of award fees, for delays. Cost-type contracts also can be more easily modified if the government’s requirements change, O’Neill said.

The Obama administration has repeatedly classified cost-plus contracts as “high risk,” lumping them in with time-and-materials contracts and sole-source awards. The Office of Federal Procurement Policy has encouraged agencies to cut by 10 percent their use of each of the three contract types.

Recent data, however, suggest that agencies’ use of cost-plus contracts actually has gone up. While agencies have cut their spending on time-and-materials contracts — considered the highest risk to taxpayers because of the potential for escalating costs — most of those contracts were converted to cost-reimbursement vehicles rather than fixed-price contracts, OFPP Administrator Daniel Gordon said last month.

O’Neill said he has received no direction from the Pentagon or the White House to use fixed-price contracting when he thinks it’s inappropriate. In some instances, he has counseled against fixed-price contracts because the Army’s estimated costs were 20 percent less than the lowest offer. He described the dichotomy as “should cost versus would cost.”

In a brief presentation, O’Neill stressed the principles of the Defense Department’s ongoing efficiency initiative to save money through reducing overhead costs, improving business practices — including more contract competition — and eliminating troubled programs.

“We have every reason to do our jobs better,” O’Neill said. “If I can do the job of 10 people with eight people, that makes me feel good.”

The funds saved from the efficiency initiative will largely be reinvested in the warfighter, Defense officials have said. The ultimate goal is a 2 percent-to-3 percent net annual growth in warfighting capability without a commensurate budget increase.

O’Neill said contractors will play a critical role in helping reach that goal. “You have got to play shortstop on our team,” he said.

The Army, for its part, recently completed a study that looked at contract requirements, overall funding and acquisition policies. The resulting plan, which eventually will be made public, now is being reviewed by Pentagon leadership.